Don’t take regulated small-dollar credit options away from Hoosiers
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Thousands of Hoosiers face periodic financial challenges, a reality recently exacerbated by inflation and economic recovery from the pandemic. As an operator of a licensed small-dollar lender in Indiana, I see the difference that access to short-term, small-dollar credit makes for my customers – helping many to manage obligations and overcome periodic bumps in the road, from occasional changes in income and life circumstances to emergency expenses.
Proposals to cap the interest rates on short-term, small-dollar loans amount to a ban on this form of credit and are advocated for by those who have never needed or used a small-dollar loan or put themselves in the shoes of Hoosiers who do. Rate cap proposals also reflect a failure to understand how these loans work and the critical role lenders like my company play in ensuring all Hoosiers have access to credit, especially when they need it most.
Reports such as the recent one from Indiana Community Action Poverty Institute make hypothetical claims about small-dollar loans in an effort to delegitimize a service valued by many Hoosiers. In doing so, the organization ignores the reality faced by my customers, who choose our short-term, small-dollar loans because they are cost-competitive, transparent, and reliable compared to their other options, including those from banks and credit unions. Further, many consumers and communities are overlooked or left behind by other financial institutions; my company and others like it provide vital, broad access to credit when other institutions do not.
Every aspect of short-term, small-dollar loans is regulated at the state and federal levels, including loan amounts, terms, and fees. Over the years, Indiana’s state policymakers have protected access to credit with meaningful guardrails to enable responsible borrowing and successful repayment.
Customers understand the costs up front – there are no hidden fees or surprises. The fee does not compound interest; whether a borrower repays their loan right away or in a few weeks, they pay the same one-time fee. The implied annual percentage rate (APR) referenced with a rate cap is not an appropriate measure of the cost of a short-term, small-dollar loan – this would be as if a borrower extended the loan 26 times in a year. My customers repay their loans in weeks or months, not years; many borrow only once.
An arbitrary rate cap would essentially eliminate regulated short-term, small-dollar lending and access to a valued credit option in Indiana, leaving families with very few alternatives. A 36 percent APR amounts to a fee of just $1.38 per $100 borrowed on a two-week loan. Lenders like my company would be forced to close our doors, unable to cover basic operating expenses. No market-based provider – not a credit union, not a bank – can cover employee wages and benefits, rent, and utilities and sustainably lend small-dollar loans at this rate.
My customers share their overwhelming satisfaction and that’s consistent across lenders in online reviews and surveys. Regulators receive very few complaints at the state and federal level; nationwide, only 0.1 percent of all complaints received by the federal Consumer Financial Protection Bureau (CFPB) last year were about small-dollar loans.
Meanwhile, in states with rate caps, consumers pay the price in unintended consequences, missed payments, and higher costs. Since our neighbors in Illinois put in place a rate cap, nearly three-quarters of residents who used to borrow small-dollar loans have been unable to borrow money when they needed it. And in every state with such restrictions, complaints about unregulated lenders surged because consumers in need of credit no longer had anywhere else to turn. Such operators evade state and federal laws and it can be hard to tell if they are reputable. There’s not much a borrower can do if and when things go wrong.
A rate cap is a ban on small-dollar loans – a policy “solution” not based on facts or consumer concern, and certainly not about addressing Hoosiers’ credit needs and financial challenges. Our state needs more credit options, not fewer, so that consumers can choose what works best for their personal financial situation.
Gus Saucerman of Indianapolis, Indiana is the president of A1 Cash Advance, a state-licensed lender offering regulated short-term, small-dollar loans in the Hoosier State for 27 years.